Category Archives: Governance, Risk & Compliance

The New Era of Regulatory Enforcement — Comply or Go Directly to Jail

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[Each year, the best Canadian risk managers gather to discuss the state of the discipline at the RIMS Canada Conference. The 2011 incarnation is taking place this week in Ottawa so I will be reporting from here for the next few days.]

“The possibility of doing jail time is real from the board room to the warehouse floor,” said Jay Cassidy yesterday at the 2011 RIMS Canada Conference, summing up the new anti-corporate fraud stance taken by U.S. Attorney General Eric Holder in recent years. “It’s not going to be a slap on the wrist. It’s gong to be very personal. And [they] will put you in jail.”

This was the key takeaway from a Monday afternoon panel discussion at the conference, which was focusing on regulatory expansion and led by Cassidy, senior vice president at Marsh Canada. Things have changed and rules created by Dodd-Frank and the Foreign Corrupt Practices Act will have wide-ranging implications — and penalties — for any offending companies.

Another trend is that regulatory agencies are increasingly working together and employing new tools they haven’t used in the past. The SEC and Department of Justice are reaching out to the FBI, for example, for expertise and resources. They have begun wiretapping when it is deemed necessary. In all respects, the regulatory bodies are widening the scope of what they can use to investigate.

One aspect of the reform receiving a lot of coverage is new whistleblower incentives. Now, anyone who reports a company for rule-breaking may be eligible to pocket up to 30% of the sum that officials deem was ill-gotten. Even if the offense is only valued at $1 million, that’s a nice little bonus for the whistleblower. Imagine if it is $1 billion.

Given this, it’s not hard to see why more people might become tipsters for the government. And according to the panelists, the Department of Justice is now expecting to receive upwards of 30,000 tips per year.

This may not lead to more major fraud rulings, however.

“Whisteblowers have always been principles-based more than looking for some sort of monetary pay-off,” said Ashley Beales, vice president at Berkley Professional Liability. “It’s usually that they just can’t keep quiet anymore.”

The money will likely lead to more tips and perhaps the discovery of more minor violations, he said, but on the highest level, Beales doesn’t expect a new wave of huge violations to start flooding out. At least not to enough of a degree that would significantly alter the D&O market, something that is generally affected by major claims. “Significant fraud always bubbles to the top [regardless of incentives],” he said. “This volume will be more noise than substantive.”

But even if it is merely noise, that doesn’t mean companies are off the hook. “Even if it’s not a legitimate claim and the SEC comes knocking on the door … you don’t tell these people ‘Go away,'” said Laura Markovich, partner at Sedgwick. “They won’t. They’ll come back with a subpoena.”

And just dealing with false claims can run up a big bill quickly. “Lawyers are expensive,” said Cassidy, noting that this is even truer for Wall Street firms. “And New York lawyers are … well … they’re very expensive.”

In regards to increased Foreign Corrupt Practices Act enforcement, the panel said that there will be two major aspects for companies to consider: (1) anti-bribery provisions and (2) the accounting part, which will mandate the need for better internal controls.

The first factor may be especially important for Canadian companies. If they have operations in the United States (or in some cases, even if they don’t) they will be at risk of regulator action. And Cassidy cautioned that this may be difficult to navigate given the fact that Canada is increasingly becoming a resource-based economy. He mentioned that in other locations where this has been the case (Cassidy listed parts of Africa, Russia and Kazakhstan), corruption and bribes have been more typical than, say, in economies in which retail or services drive the economy. “Historically, business has been done a little differently than what we might find acceptable [in Canada],” said Cassidy.

Canada is certainly not Nigeria. The business climate and legal culture would never allow for pervasive bribery and other illegal behavior. So for those in the energy and resources sector, the obvious solution is to remain above board in all operations.

But I do image that many companies will find that, when shipping oil and coal throughout the world, staying true to your ethics — and even within the code of the law — can sometimes be easier said than done.

[Correction: this post originally listed Ashley Beales as working for Canada Berkley. It has been update to reflect the fact that the company is called Berkley Professional Liability. Apologies.]

Guest Post: Compliance in the Restaurant Industry

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According to the National Restaurant Association, nearly 13 million people are employed in the U.S. restaurant industry. And even in our current economic climate, the industry is expected to hire more than 1 million additional restaurant workers in the next decade. That’s good news for such a risky business sector. Even during the best of times, the restaurant survival rate is low. One Ohio State University study found that 59% of new restaurants closed within three years.

With the odds stacked against them, the last thing any restaurant owner wants is to lose money – not from lack of customers – but rather from an imperfect understanding of the federal and state restaurant industry compliance regulations governing their employees.

The physically demanding work and reliance on tips as remuneration for employees places restaurants in a unique position when it comes to federal and state industry labor regulations. There are several key areas of the law of which restaurant owners should be aware to prevent expensive and time consuming audits or lawsuits.

The primary law impacting restaurants is the Fair Labor Standards Act (FLSA). The FLSA a federal law setting minimum requirements for the working conditions and compensation of workers.

All restaurant employees are entitled to certain wages and benefits. The federal minimum wage is currently $7.25 per hour for non-exempt employees. Be wary: individual states may have higher minimum wages. Check the laws of your state to be sure.

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This minimum wage standard is uniquely applied for “tipped” employees or those who make more than $30 a month in tips. Many restaurant owners can take credit for a certain amount of money their workers earn in tips and apply it to the payment of the minimum wage. Different states regulate this area of the law in different ways.

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All employers must inform their employees in advance if they intend to count tips towards the minimum wage, and they must provide evidence to the government that the employees are receiving at least the minimum wage after combining wages and tips.

If employees are required to work more than 40 hours a week, they must receive overtime pay at a rate of at least 1.5 times the employee’s regular hourly pay rate. The National Restaurant Association’s website provides guidelines on How to Calculate Overtime for Tipped Employees.

Furthermore, if any of your employees are under the age of 18, there are special laws that apply to their working conditions. Minor and adult employees are both entitled to the same minimum pay and overtime protections. However, minors are also subject to federal youth employment regulations. More information about employing minor workers is available at the Department of Labor website that focuses on youths.

Navigating the maze of labor regulations that apply to the restaurant industry can be a daunting task. With careful planning and research, however, employers can minimize their risk in an already risky business venture.

(For more on risk management within the hospitality industry, check out the September issue of Risk Management.)

The Financial Industry: Cyber Security Laggards

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We have seen it all around us lately — the financial industry’s inability to guard against major data breaches.

Just last month, Citibank, the third largest bank holding company in the U.
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S., experienced a data breach when hackers obtained information on more than 360,000 credit card accounts of North American customers. And just last week, Morgan Stanley announced that data of 34,000 clients was lost or stolen.

According to two letters sent to clients, and obtained by Credit.com, the information [of Morgan Stanley customers] includes clients’ names, addresses, account and tax identification numbers, the income earned on the investments in 2010, and—for some clients—Social Security numbers. The data was saved on two CD-ROMs that were protected by passwords, according to the letters, but the CDs were not encrypted. The company mailed the CDs containing information about investors in tax-exempt funds and bonds to the New York State Department of Taxation and Finance. It appears the package was intact when it reached the department, but by the time it arrived on the desk of its intended recipient the CDs were missing, Wiggins said.

The Citibank breach has been referred to as the largest direct attack on a major U.S. financial institution. Since the attack, the Federal Deposit Insurance Corporation has been preparing new measures on data security, which proves to be much needed.

The financial industry has become somewhat of a laggard when it comes to data security initiatives and the risks of data theft are rising.

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According to a June report by IDC Financial Insights, “As financial institutions expose more capabilities to their clients through their digital channels, they must introduce more sophisticated mitigation and control techniques at a similar pace.” The report points to mobile applications as the next new target of cyberattacks.

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(Check out the next issue of Risk Management for more on this topic — online August 1st).

To approach these inevitable risks, there needs to be a change in the role and focus of enterprise risk functions, according to the IDC Financial Insights report. “Cyber risk is an enterprise risk issue, not an IT issue, and as such needs to be addressed from a strategic, cross line-of-business, and economic perspective. The CFO, not the CIO or CTO, is the most logical person to set strategies and lead the efforts required to address the cyber risk challenge.”

The following is a chart that shows that cyber risk is an operational risk component, according to IDC Financial Insights.


Do you agree with these findings? If not, how do you think the management of cyber risks fits within the realm of business’s risk management plan?

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The Perils of Email

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In the business world, we send a lot of emails. More than 40,000 a year, according to a study by the Radicati Group. But as Felicia Harris Kyle of Sutherland Asbill & Brennan LLP points out in an online exclusive article in Risk Management, this reliance on email is not without its risks, particularly when it comes to the legal threats it creates.

As email and text-messaging increasingly become the primary forms of communication, the continued widespread use of email and texting in the corporate setting creates a whole host of interesting issues for companies and their lawyers. In litigation, for example, emails are an important component of discovery and often contain the proverbial “smoking gun.” The best defense is a good offense, which starts with a thoughtful analysis of the threats, backed by sound policies and practices that may ensure the proper use, retention and handling of emails and other electronically stored information.

Among the topics she discusses are information retention policies, the effect of litigation hold notices, how to avoid sanctions and the usefulness of forensic reviews. So don’t miss this informative article, only on RMmagazine.com.